If it can be built and ramped up, yeah, everyone can get paid.
It's great. You have, you know, CapEx
blowout management team can't deliver, you don't get the
commodity price tailwinds you were expecting and all blow up
pretty quickly. Fraser welcome mate, how are
you? Hi, guys.
I'm good. Thanks.
Fraser Perry JD is our guest joining us on Mike today.
Fraser is well to start off with you, just a great bloke.
I've talked to you. You give us so much energy.
Like some of the books on his bookshelf were kindly donated to
you. But that's not your biggest
credential. You've come out of just a career
in private equity, a mining engineer.
These days you're working in corporate development at A, at a
growing miner, ASX miner. What we're going to talk about
today is the role that private equity plays in the mining
sector, financing mines into development.
The, the ways of private equity or that pool of capital is
changing over time. The, the challenges that the,
the model has and the opportunities that presents the,
the, the incentives along that we're going to kind of open the
curtain on what's been a bit of a mysterious pool of capital to
ask to our listeners. And we're delighted to have your
your expertise kind of peeling back the curtain on some of
these big topics. Fantastic.
Yeah, pleasure to be here, guys. Private equity was a black box
to me Yeah, before I, I joined my last role, which was at RCF
Resource Capital funds. I remember, you know, working as
a mining engineer, applying for this job with RCF, I'd seen on
LinkedIn and thinking what is private equity?
Trying to Google what they, what they even do, what the structure
is. So thankfully, you've learned a
huge amount of how it operates and how mining private equity
funds are set up. But yeah, there is very little
information you can sort of glean, you know, publicly.
So happy to share what I can from my experience on the
inside. It's a big.
It's a big player in, in our market and it's an even bigger
player in, in global investment markets.
It gets huge capital allocations from endowments specifically in
the US. But I'm super keen to unpack it
because we obviously speak with heaps of investors on this show,
but we never speak with private equity investors because they're
a bit coy, they're a bit shy, they're.
Not allowed to because the money comes from US pension funds and
they're bound by all these SEC restriction restrictions and so.
RCF no different. RCF no different.
Yeah, we never, we, I don't think we've ever had a private
equity group that has said, yes, you can voice my comments.
Yeah, it just doesn't happen. I think you spot on, but we need
to pull back the curtain because they are still very present in
our space. We have spoken so much about
like recent deals, you know, Quintero's one that comes to
mind, great bit of action then going at it for, for New World.
So we're, we're really excited to, to peel back the, the
curtain, understand what you learnt on the way, how your
thoughts after the fact change from what you thought you were,
you were jumping into. And I think for a lot of punters
out there, just understand the the role that they play, the
return expectations that people have and what the industry is
going to look like in in five years, in 10 years and beyond
that. You know, and in a, like a, a
theoretical sense, like the model should should work well
because you're marrying patient capital with a, with a, with a
cyclical kind of uplift, like there's a cyclical nature to
commodities businesses. So like in theory, there's a lot
of merit to this, this, this model.
The actual empirical data of returns from private equity
asset class in mining, however, has been on balance pretty,
pretty, pretty below average. Would you agree with that?
Yeah, look, pretty mixed history and perhaps we'll get to that.
You know, performers as we, you know, the conversation evolves.
Perhaps a good spot to start is probably the structure.
So, you know, you've had lots of great guests come in, you know,
fund managers, managers, you know, long, long only or long
short public equity funds, private equity funds set up
quite different differently. You know those funds, you know,
closed end funds, yeah, they have typically a 10 year
lifespan where the fund manager goes out to, you know,
prospective investors who are the limited partners.
Yeah, they ask for capital commitments and that is
effectively raising the fund. Once the funds raise, they have,
you know, a short amount of time to deploy.
It's typically, you know, first five years of that 10 year fund
and then they have to distribute the capital back to the
investors on the back half of the fund there as well.
The investors in the fund will pay, you know, fees for that
privilege to be part of that fund.
So there's a management fee, you know, paid, you know, to the
fund manager. And there's also a performance
fee. You know, if the fund can
perform above a hurdle rate, you know, they'll pay a performance
fee to the fund manager as well. So it's this fixed time frame
that probably creates most of the constraints and where it's,
you know, most different to, to other funds that, you know, can
go in and out of things all the time, can recycle capital all
the time. If you have a private equity
fund, you know, they're typically, you know, 5 to 10
very concentrated investments in that fund, you know, within 10
years of the life of that fund. You know, finding opportunities
can take a few years. Executing on the deals can take
a few years. You know, seeing the value
creation and those investments you know grow and mature, it can
take more than a few years and then finding an exit and getting
liquidity can take a few years too.
So it's really hard to get everything done timing wise, you
know in that 10 year period and especially so in mining in
commodity markets which are really volatile.
You know to get one, you know, to come in at the bottom of the
cycle and then get your timing right to exit at the top of that
cycle and time it perfectly in that 10 year period is really
hard. Yeah, I I couldn't agree more.
Private equity used to be called leveraged buyouts and it sort of
evolved and and changed names. But the concept came from having
a small bit of equity, borrowing a lot of money, taking a company
private, optimizing how it kind of runs, operates, you know,
think of an industrial type business and then sell it back
out, IPO it. But the the model has changed
massively. And when we look at private
equity companies in the mining space, they don't all have the
same strategy. Can you share a bit of detail on
on what you've kind of picked up on the on the various types of
strategies that these PE groups have?
Look, fundamentally, what are these private equity funds
trying to do? Well, like everyone on on the
buy side, they're trying to make money.
The target returns for these funds are typically that, you
know, two to three times multiple on invested capital.
Private equity likes to talk talk in multiples, you know,
less so IRR that you know, public equity markets talk
about. And that's probably because you
know, it's typically in private markets, it's a long period of
time. The investors that that come
into private equity allocate into this asset class are
thinking of it slightly different to, you know, people
that are trading on a lot more regular basis.
So. But it invests the time frame.
That that, that is measured from the time that the the capital is
deployed. So let's say you a fund they
raise a billion dollars, right and they've got five years to
deploy that billion dollars and they're incrementally doing that
with different opportunities that come up.
Each one of those, like the multiple invested capital, is
sort of measured from the point in time of which.
There's lots of ways to cut it, right, Lots of ways to cut it.
So in private equity, you typically hear, you know, funds
or, or managers, Yeah, the fund managers, core managers, the
GPS, you know, talk about things in terms of gross and net.
So, yeah, the gross multiple is the multiple from the day you
make a capital call to your LP's.
So you've found this great deal, you've got a term sheet that's
ready to go. You'll make a capital call to
your LP's so that you can fund the deal.
The day that capital comes in, that capital starts accruing A
preferred return that the fund manager is going to have to be
at the end, and that's the day these multiples start ticking
is. That the same day they start
also earning a fee. That's right.
So the fund manager deployed funds can start clipping a fee
there to manage that AUM there. So as time goes by, eventually
get towards the exit again, you sell the business, you're
waiting for the capital to come in.
The capital finally comes back into the fund.
The fund can perhaps recycle a little bit or it can distribute
it back to the LP. The day it comes back in, you
crystallize that investment and you can see what the gross
multiple is there. The net multiple takes out all
the fees there that the fund manager clips.
So you know that management fee that was, you know, taken along
the way, perhaps its diligence costs and things like that.
So you'll see a spread between the gross multiple and the net
multiple. What's the typical spread
between the two? Depends how far you are along in
in the fund life, you know how far that preferred returns
accrued. But yeah, probably like 20%
difference. And just quickly for people
listening, you've got the GPS who are the ones that manage the
money, they invest the capital. The general partner.
The fund manager. And then the LP's are the ones
that give their money to the fund, most often the endowments.
Yep. The commit, the commitment.
Yep. So the limit partner makes this
commitment. And you know, limited partners,
yeah, we'll get to that. That's changing who they are.
But typically your pension funds, endowment funds, et
cetera, those, those sorts of groups that, you know, within
their portfolio, they're allocating to real assets.
You know, sometimes there's a specific bucket for, you know,
alternative alternative assets and you know, there's a private
equity bucket. But typically for mining PE
funds, they're sitting in the real assets bucket.
You know, where there's, you know, there might be investments
in, in, you know, other PE funds that do infrastructure or just,
you know, direct investment into some infrastructure projects as
well and things like that. For those LP's, those like
endowment funds, is the actual model, like private equity model
just a very familiar model and they have like a, you know, a
kind of a regimented understanding of like the
private equity model and then they're just porting that over
to to mining sort of expecting similar.
Yeah, remember, I mean, PE has been around generous PEA for a
long time, you know, multiple decades.
Mining PE is probably a newer thing.
You know, there's in, in ballpark numbers, sort of, you
know, 15,000 or so, you know, PE funds that you know, aren't
fully closed, you know, they're still still out there, right?
I would say, you know, mining's probably 40-50 of those.
And how do you call it mining? Some do, you know, oil and gas
and a little bit of mining. Some are generalist with like 1
mining investment in the whole portfolio.
So depending how you cut it, maybe there's a few hundred that
would ultimately do an investment in natural resources.
But mining PE is still such a very small part of the whole PE
landscape. So for these asset managers,
yes, it's a very familiar your business model and asset class
for them. Yeah, mining PE is something
that's probably more unusual. Can we talk about the, the, the
theory of making money in private equity in mining?
Is it as simple as like I'm going to buy something at a
discount to NAV and then like that, that asset is going to get
developed over time and and I'll be able to sell it at A at a
lower discount than have or, or is it about turnarounds?
Is it, is it a bunch of above? Is it counter cyclical?
Lots of different strategies so that you got that target return
of you know two to three times, yeah, your money.
So get two to three times ideally, you know a net Moik
multiple invested capital. How do you get a get a 2X?
Well, couple of different ways to do it.
The traditional private equity model likes to talk about deals
in terms of, you know, growth value.
Yeah, the growth model, which is typically in mining is building
a project, you know, projects that sit in that development.
Sage, you know, the Lausanne curve just like your logo here,
things have a deep discount. You know, we're in that
development phase. And then as they de risk taken
through construction, successful ramp up, after that we'll get a
rewrite. You know, depends at which
commodity, which point in time, which stage you're at.
But generally, you know, development stage project, you
know, with a study sitting at, you know, .5 NAV, build the
thing successfully ramp it up. It should be close to a one
times NAV. Now you know, that can change
all the time. But in principle, you know,
that's how you get your 2X return, you know, provide some
capital to a development stage project to allow it to be built.
You know, oversee the construction and the ramp up and
then and then sell it on the other side and then you get your
2X. That's your typical growth
strategy and that's I would say a hard strategy to execute on.
You know, there's lots of things that can go wrong through
construction ramp up. We can get to that later, but
it's a pretty hard strategy. Other strategies, I think you
could broadly turn them sort of value strategies.
So that could be a turn around opportunity.
Yeah, that could be an operating asset, you know that's in the
4th quartile and it's struggling and you know you need to change
management and you need to change operating practices and
you can turn it around and you know change, change the cash
flow significantly there and then flip it that that can work.
There's a consolidation strategy where you know, there's M&A to
do, you know, we've got perhaps stranded, you know, mining
assets without a processing solution.
Great example, there was sort of Genesis acquiring lean or assets
from Saint Barbara. You know Genesis had Ulysses
project at that time. Yes, St.
Barbara had Gwalia process plan as well as Gwalia mine.
Yeah, some very logical synergies there, you know,
putting the ore in a mill, something as simple as that.
Or it can be more broader, you know, roll up strategy across a
whole region where there's a lot of subscale deposits that
collectively could run a hop and spoke strategy and get it to
achieve critical scale, things like that.
So that's the, you know, consolidation strategy there or
roll up strategy that's called in generalist PA or bolt on.
But you know, I've seen that work quite a few times.
And I guess there's also the the Special Situations, you know,
that are quite nuanced and they're all situations specific.
Those ones are probably harder to plan a fund around in terms
of, you know, we're going to do so many of these types of deals
they they come up. But yeah, all of the different
fund managers will be thinking about this in a certain way.
Some are thinking, yes, we're going to focus large, you know,
a portfolio largely on building projects, provide that
construction financing. Some others, you know, just
focusing on, you know, development stage assets, you
know, de risking them, you know, with more technical work and
then ultimately finding an exit there too.
So lots of different ways to still get your two to 3X.
So one of the other ones we've seen, Fraser, is what Tembo have
done a few times and that's minority stakes and that that's
a real point of difference versus traditional PE.
They're not buying the company outright.
They're taking a, call it maybe a 20% stake in a, in a public
company. What?
What do you kind of think of this?
Point come to mind, yeah. Orks point another one.
This strikes me as a bit more of a a more recent revelation.
Equity. Yeah.
So how do you kind of connect those dots and think of them in
in the PE context? Sure.
Yeah. And that and the strategies can
can be right into the spectrum. So for example, yeah, some of
those investments I'm familiar with that Tembo's made are
probably more like a, you know, public long equity fund, right?
Yeah, they're minority. They're enlisted vehicles.
They're pretty liquid as well. They might not necessarily have
a lot of, you know, influence and control in the investment as
well. The the challenge is for the
fund manager when they're raising these, you know, funds,
you know, their pitch to LP's is, you know, their value add.
And typically that's going to have a degree of sort of
influence and control in their investments.
You know, they're not passive investors.
They're, you know, active investors that want to be, you
know, on the board inside the business and having a seat at
the table on a lot operational strategic decisions.
So yeah, there's, there's a huge spectrum.
Perhaps we can sort of talk through the mandate of these
funds and you'll get a sense for how you know they're different
in terms of the strategies and and where they allocate to.
What are the what are these? It's the mandates.
Like just put the when when you go out and raise a fund, here's
the mandate. Or do the L, the L, the LP's
themselves actually have like, you know, you've got to follow
these certain criteria in order to raise the money in the 1st
place? Like who dictates this mandate?
The fund manager, when they're going to raise the fund, this is
the mandate for that specific fund.
Some managers might have multiple funds in the market,
you know, different strategies like a private credit strategy
and a private equity strategy. So they'll, you know, be very
explicit in these documents as to what they're going to go
after. They can and can't do.
Yeah. So capital position in the
capital structure is a great one.
Yeah. Is it going to be focused on
debt and have security there? Is it going to be subordinated
in the capital structure or is it going to be equity as well?
Or maybe, you know, there's going to be a portfolio approach
where, yeah, 1/3 of, you know, the fund might be this and that
the other. But that's probably the biggest
point difference is, you know, where they are going to be in
the capital structure. You know, groups like Orion,
particularly in their, you know, mine finance fund, which is the
traditional sort of, yeah, private equity fund.
Yeah, they're typically financing projects in the
construction phase and it's typically debt at that point.
Yes, there are some nice management teams that like and
they'll go do an equity investment for part of that
fund. But, you know, the fund is
largely focused on on debt. And if they can get a royalty on
the back end, happy days too. Yeah.
And and look, they're still targeting similar returns,
right? There's debt style returns and
equity style returns, but you know, these debt style returns
are pretty close to equity style returns.
You're still targeting a 2X, you know IRS that are in the, you
know, double digits as well, right?
Well. You know, in project finance
like generally you're, you're taking equity like risk because
if the mind doesn't work then. Yeah, it can.
Be it can be a pretty bad case for the, for the, for the debt.
I'm saying lots of these, you know, very exotic structured
term sheets for sort of preferred equity.
And yeah, lots of bells and whistles on these term sheets,
but effectively it's a binary outcome, right?
You know, if it can be built and and ramped up, yeah, everyone
can get paid, it's great. But you know, if you have, you
know, CapEx blowout, management team can't deliver, you don't
get the commodity price tailwinds you were expecting,
Yeah, it can all blow up pretty quickly.
So I think it's a full sense of security depending on, you know,
having this position in the cap structure.
You know, there's, there's a lot of examples of, you know,
projects have been financed by private equity that have been
refinanced, you know, straight after construction or, or, or or
even later as well. So yeah, capital structure is a
big one. Jurisdiction I think is also a
good one to talk about. You know, you talked about Tembo
and investments here in Australia with you know, Spartan
Greatland and others. You know, they're, they're
groups that will solely focus on, you know, Western mining
friendly supportive jurisdictions like Australia,
Canada, US. Cantera is a good example that
exclusively focused on those places versus other groups that
will have a bigger risk appetite to go in more difficult
jurisdictions. You know, to speak to some of
the examples from RCF's portfolio in the PE fund, I
mean, they're built, you know, the RG Gold project in
Kazakhstan. They've been investors in Ozone,
which is in Burkina Faso. So, you know, I mean, West
Africa to, you know, Central Asia complete other ends of the
spectrum as well. So, yeah, that's an important
point. And and as we get to sort of how
pay is evolving, I do think, you know, the the jurisdictional
focus is becoming quite important to some LP's.
They're very focused on, you know, Western supply chains and
being able to specifically allocate to that thematic as
well. We've got to talk about that
later because the interlock with government these days is a huge
step forward that we've seen in some of these funds and what
they're doing going forward. But when we keep going with,
with the mandate, we've kind of talked about the stage of the
asset, but I think we really need to dive into this one.
And I'm, I'm curious to hear what you think, Fraser, about
how this is evolving as well. Because taking that risk, as we
kind of said for a project that is going to go into
construction, that's a huge amount of risk like that is a a
very large. Step to take.
And that's why I think we've seen the likes of Quintera say,
hey, we want to take this from .4 NAV to .6 NAV and and sell
it. And keep it in development stage
pre FIA that's. The project, So what what are
the other stages of assets you, you see and maybe if there's a
few examples that come to mind that are that are being targeted
out there. Yeah, sure.
Look there, there are other strategies that fit into this,
you know, broad PE box of, you know, taking assets as far as
sort of early stage expiration, where, again, you know, really
like the exploration team, their their history and you know, the
the package they've put together and you know, the targets
they're showing. So, you know, RCF had a strategy
called the RCF opportunities fund that, you know, did
allocate to things as early as that and then more advanced.
You've then got, you know, strategies that focus on those
development stage assets, you know, finding things that are
pre study that that look promising that, you know, it's
quite simple to do a study or take it from say a PFS study all
the way to FID and do a lot of the heavy lifting there on, you
know, DFS feed work. Getting, you know, engineering
companies engaged quite early and taking it through
permitting, you know, removing a lot of the big overhangs that
that follow with the development stage project.
And, and one of the big things here, right, is the signalling
that comes from future investment, because mining is
such a capital hungry industry that if you take it from A to B,
but then say you're no longer going to going to fund it, what
is that kind of signal to the market?
So you're actually on the hook to to continue in in certain
cases the the check writing. Yeah.
Look, speaking from experience, I think that strategy on taking
things through early stage development to FRD is a hard
one. You're probably more reliant on,
you know, commodity tailwinds in general, you know, hype around
the commodity that that gives you liquidity and and drives
your returns there. You know, this is the real heavy
lifting work that you'd typically see someone do it if
it was a pathway to building it. Yes, it's so companies in that
development stage and they can run an equity check, the PA fund
can run an equity check early that they'll fund that de
risking and get it to investment decision.
And then they've got a seat at the table to be in, you know,
prime position to provide financing to construct it as
well. So I think, you know, just using
the development stage and the valuation is quite an attractive
entry point to set yourself up for follow on funding as it goes
through, you know, construction and then start to play a little
bit higher across the capital structure.
You know, bring in other Co investors as well.
It's really a way of having somewhat, somewhat of
exclusivity on, yeah, the project financing piece, which
might be, you know, bigger, more meaningful for the PE fund
there. Yeah.
And, and when these groups think about diversification across the
fund, I'm really curious to hear your thoughts because you might
get some that are targeting critical minerals or Western
minerals, but the, the correlation between some of
these tends to be much higher. So what have you kind of learned
from how the PE group spread their bets across different, you
know, asset types against different commodities against
different jurisdictions within a fund to make sure that they're
not all betting on the same one thing?
Yeah, that, I mean portfolio allocation and particularly how,
you know, you think about commodity strategy is, is
absolutely critical, I think to having sort of, you know, a
fairly diversified, you know, portfolio and, and something
that can deliver through the cycle.
Look, I haven't seen any specific, you know, language in,
in, in mandates and and strategy, but I think everyone's
thinking the same way. You know, commodities that are
really volatile. Yeah, are are really hard to to
build, right? Yeah.
If you know, if it takes, you know, quite a few years to, you
know, finance a project, build it, ramp it up and you're in a
volatile commodity like lithium, you know, you might miss your
window to exit that and and you're in a 10 year fund, you
might not have another window there as well.
So for really volatile commodities, you know, you think
lithium, you know, tin and other things like that, perhaps, you
know, having, you know, an equity strategy, you know,
pretty like small minority stake in a listed vehicle might be a
better way to play that because you can go in and out quite
quickly. Yeah.
Look, I mean, RCF made an investment in Pilgrim Minerals
when it acquired Altura Lithium. It's operation there that was
from memory seven 8% equity investment in a public company.
When lithium ran straight after that, in a very short amount of
time, it was a pretty liquid investment that they could exit.
If you were to be building a new project, say, yeah, in theory it
was another lithium mine and he provided debt at the same time,
you know, it would have just started to repay that debt just
as lithium had created, you know, two years after that, and
you'd probably be refinancing that or, you know, it could
potentially be bankrupt as well. So getting the strategy right
for the commodity is really important.
Yeah. We haven't touched on it all,
but these returns are all generally driven by commodity
price tailwinds. You've got to have some support
there from the commodity. And that a big piece is just,
you know, having a strong view on the fundamentals of that
commodity over, you know, the whole period, whether that's
sort of, you know, three to five years that you're going to be in
a better position there from the commodity wise.
So if things like CapEx blow out, you know, management don't
work, you know, if those things move against you, at least
you've got something that might, might.
So you get close to a 1X. Yeah.
And that's why I like I challenge the merit of a
diversified commodity fund. Like in some respects, like you
have a small number of commodities that you're bullish
on in that window of time. Like you're that's right.
You're not going to like if it's, if you're only bullish on
gold and copper and and call it and one other commodity in that
like in the five years you have to deploy it like you don't want
to making sure you've got diversity of everything because
something it's a cyclical industry you're trying to ride.
Yeah, and and you and, and that's your pitch, right, You
know, Yeah, the fund manager in in this mining PE fund is a
specialist in this commodity. They've got, you know, a lot of
deep insight in these commodities.
So they're making very concentrated targeted
investments for these commodities.
Yeah, RCFS fund seven, yeah, fund in the P fund there.
I mean that had three major gold investments.
I think, you know, would have been close to half their
portfolio would have been allocated to gold at one point.
And you know, look where the gold price has gone.
That's been a fantastic bet for them in that regard.
So you're allocating accordingly to how strong your views are on
the commodities is critical. Some other funds, you know, do
like to, you know, their returns are driven more by that rewrite
through construction. So they'll be not agnostic to
the commodity, but they'll happily do industrial minerals.
And there's some examples there, Orion's, you know, funded, you
know, construction for projects in salt and gypsum there,
mineral sands as well. So again, commodities where you
probably see, you know, less huge tailwinds there.
But you know, if the construction, you know, goes
well on time, on budget, you ramp up, you can still get your
return there from that rewrite. You don't necessarily have to
have these, you know, phenomenal commodity price tailwinds as
well. Trav, you know what private
equity loves? They love an easy win.
They love being able to goose that IRR with a nice easy win,
be it a producing asset or a development stage project.
And I've got a little one that comes to mind.
I'm curious if you're thinking the same thing when it comes to
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Thanks Sandvik Ground support. To the point of concentration, I
think it would be the perfect time to speak about incentives
because as you know, they they drive almost everything and
there are so many different kind of incentives from the different
parties involved here, but they're a huge driver of the way
these PE funds act. So can you break down management
fees, performance fees and then we can kind of get into to how
these shape the behaviors? Sure.
Well, look, most, most all PE funds will have a management
fee. You know, that's to keep the
lights on, pay staff. And it's probably no different
to other, you know, managed, you know, public equity funds as
well. So you know that, that that's
salaries, you know, typically 2%.
We're starting to see that come down for some newer funds.
You know, maybe it's 1 1/2 percent of, you know, assets
under management. And that's, you know, those fees
accrue on capital that you've called from the investors as
well. Doesn't start day one stays,
starts the time they start coming in.
And if you distribute the capital back, you know, you're
not accruing fees on that as well.
So that's, that's pretty par for the course.
The real incentive in the private equity model is the
performance fee. So that fund manager, you know,
that is that is the huge leverage they have is, is
getting the performance fee if the investment goes right.
So you know, that is a performance fee.
It's typically, you know, a large percent of you know,
profits above a hurdle rate. 2 and 20 the prevailing.
Model that's, that's typically what it's been, but again, it's,
you know, it can change. It's very, you know, it's
confidential amongst all, all the different funds.
But you know, you know, there is some pushback now.
I think, you know, there's yeah, that's been a traditional model,
but a lot of investors are starting to push back on that
and, and funds are, you know, managers are starting to offer a
slightly lower fees in some places as well.
But yes, typically the performance fee is, you know,
around 20% of, you know, profits above the hurdle rate.
So that what's the typical hurdle?
Rate. Probably 7-8 percent, something
like that. So the GP, the fund managed
there, is really incentivized to do 2 things, get a great
multiple and get it really quickly and distribute that
capital, you know, quickly back, back to the LP there.
Ultimately, the PE fund manager is in the game of distributing
capital. They're raising capital with
these funds and distributing it, you know, ideally as fast as you
can. Those that have been successful
in raising lots of funds and having a lot of longevity in the
industry, I think aren't necessarily focused on the
perfect outcome, getting the highest multiple.
It's all about providing liquidity.
So you know, you might be leaving something on the table,
but you know, finding an exit or, or taking the exit if it's
on the table and there's liquidity there and, and
providing distribution back to LP's is really important.
So time, time is everything and you really do have to, you know,
work hard to get there. So that's what motivates the
fund manager. You know, people who sit inside,
you know the the fund manager who might have carry, that's
generally, you know most senior people, you know there might be
having carry. Is exposure to that 20%
performance? That's right.
Yeah. So the fund manager, you know,
contributes to the fund and that's what aligns them.
So in the, in the 2 and 20 model, you know, they'll
contribute 2% of the capital into that fund so that that's
their skin in the game. Effectively, it's the leverage
they'll get from the performance fee on the way back.
If assuming, you know, there's some nuances to it, but assuming
the fund has a 2X and, and, and it's all paying carry above this
hurdle rate that, you know, 2% of capital that that came in,
you know, is effectively A10 X for the carry holders there,
right? So huge leverage for them if it
goes well. On the contrary, if it doesn't
go well, you know, they've put capital into the fund and mine
don't actually see a return on it as well.
So that is, you know, the model's way of aligning, you
know, the fund manager to the LP's in there and incentivizing
them with this huge leverage, you know, to make it go well.
Can I, can I peel into some parts of that model a little bit
too? So, so the 2% that is like the
management fee and and that gets that gets triggered from the
point that the the capital call happens.
But that's 2% on funds deployed, not not mark to market of what
whatever the portfolio is worth at that at any point in time
because you can't mark to market in a liquid mine that didn't
work. Cost based.
Cost based? Cost based.
Cool. And so, you know, are, are there
some cases where like a, a fund might might have existed or
whatnot and there's a few things in the portfolio that went pear
shaped, but but because and so there's no chance of getting any
carry, but there's but there's no real incentive to not exit
the portfolio. Because it's.
Still still kind of 2% being paid on a, on a much higher, you
know, number than than and just get like a zombie fund that's
out there. Yeah, whether it's intention or
not a different question. But you know, finding liquidity
for, yeah, private companies and some of the niche commodities in
far-flung places can be difficult, right.
So, you know, you can't necessarily just, you know, go
to market and sell these and find an exit whenever you want.
You might have a very small window and you might have to do
a lot of work to get there. So they inevitably sit there.
And yes, there is a management fee being like a crude on on
these on these investments that sit inside the funds.
So again, makes it really hard for the fund manager to try and
catch up on that. Yeah, there is, you know.
That's that's one of the interesting incentive like
things I can see about the model.
Another interesting incentive. I've got two more of these.
Another interesting incentive thing I can see is like.
It's an issue. I agree.
It's, you know, it could be abused.
Or just something to be aware of.
There's another one is like the the motivation to deploy very
quickly. Like if you're, you know, like,
because you're like, I think like I think of the, the
Quintero example as a, as a great one.
What what amazing motivation there is to deploy dry dry
powder as a as a freshly raised PE fund because you start.
Yeah, big management fees mean you can, you know, build out
your own team, you can assess more opportunities, you know,
you build out the platform and the capabilities of the fund
manager itself. Because you often see the next
raise within a couple years as well.
And the faster you deploy and if nothing went pear shaped, then
you can you can raise another fund before you have something
in the portfolio that went pear shaped, if you know what I mean
as well. So like.
Cantera's Fund 2 was less than two years after Fund one.
Yeah, that, that's right. I mean, if you can get momentum,
I think as a fund manager, that's a great way to set up,
you know, it's a sustainable business.
Or give yourself a lot of runway, you know, to to stay in
the game, right? Yeah, because there's going to
be a lot of bumps along the way. And the last, the last kind of
incentive thing that I, I wanted to raise was, so you've got five
years to deploy right now. When that five years typically
is is approaching and you actually haven't fully deployed
the fund, then like have you heard stories of, do you ever
observe like PE groups like that that may have actually, they may
have just like, you know, there might have been some asset that
was financeable, but it'd been kicked around a very long time
and then because because the the the window was closing, you
know. I can't think of any examples.
I can think of some other examples or funds that know of
where you know it wasn't fully deployed.
Yeah, which is not an issue at all.
It, it just means when you go to market to raise your next fund,
they'll say, yeah, how much did you deploy from your last one?
You say, well, we only deployed 80%, so it makes it hard to
raise a bigger fund. It's all about, yeah, can you
fully deploy capital for this particular strategy?
As a function of the the opportunities that are out there
as well. Yeah, time in the market, that's
right. And you risk appetite.
So yes, there's incentives from the fund manager to to, to fully
deploy the fund regardless of, you know, the quality of
investments there. But, you know, you want them to
be incentivized by that performance fee.
And then coming back to incentives, generally, I think
if they're, you know, first time fund manager, you know, they're
there to make it, you know, they're personally incentivized.
You know, it's not like, you know, they're made per SE and
somewhat of a, you know, a lifestyle.
Yeah, those are the ones, if I was investing in a pay fund,
that's what I would be looking for, you know, someone who's
personally, you know, got the most to gain than anyone else,
right. And it, it's an important thing,
you know, LP's coming to funds do a lot of diligence on the
fund manager themselves. You know, even before there
might be a portfolio of, you know, pipeline investments that
they can show, a lot of it's focused on track record and you
know, the capabilities of, you know, the key people in in the
fund. I think there's a good reason
why Buffett set no management fee and a higher performance fee
because he was pretty aware of these things back in the day.
There's one more incentive I do want to talk about though, and
that is of the endowments. So we spoke about them
allocating a small slither of the, the massive amounts of
money that they have and could be super funds here in
Australia. But we, we like to think of the,
the universities and other endowments in, in the States.
And I'd love you just to share a bit more color on how they might
think about allocating to, to mining it being maybe a slither
of an allocation that goes towards private assets and a
slither of that is onwards pass to real asset investments, you
know, commodity related type things.
And maybe the incentive that they have for it to be a private
asset that's not always going to get marked.
It's not going to get marked on a, on a daily basis.
It's much steadier in the portfolio to make their, but
returns look more balanced, at least for a period of time.
Well, Kevin, just saying no, no expert on on this subject.
This is all, you know, secondhand not haven't been yet
spending a lot of FaceTime with with those sorts of asset
managers. But what I could say is that,
you know, they, most of them don't understand mining.
You know, in terms of finding those that understand mining,
that's quite rare. So a big part of the the
marketing of the PE fund is probably just educating, you
know, these LP's on why they should allocate to natural
resources and commodities. So that that is a big piece.
The second piece is those that do understand commodities.
Yeah, still, you know, need still pretty simplistic in
their, in their approach there. You know, all these PE funds in,
in mining have, you know, quite nuanced and, and diverse
approaches. So you know, they're receptive
to to all of these and they're probably going to allocate to 1,
maybe two of those. But you know, just finding those
that you know, want to allocate to mining is is hard enough.
So that's, that's how they think about mining.
If you go back a step, yeah, they, they have these enormous,
enormous funds where, yeah, they're thinking more about, you
know, how much they're allocating to, you know,
private, private markets. That's a big decision as well.
So, yeah, minimizing volatility in the portfolio, having
exposure to private equity where there's largely like private
asset classes that can be sort of mark to market, you know,
without the volatility of, you know, movements in the macro
environment that that is a nice way just to smooth out their
portfolio. And that can be, you know, one
of the reasons why they're entertaining looking at, you
know, other private equity managers or increasing the
bucket size that's going to to private equity and potentially
like, you know, mining private equity funds.
Yeah, yeah. That, that education component
is I think that's prevalent for for all investors in the mining
space as well, specifically the ones outside of Australia.
I think in Australia we get it a bit more.
But Even so, there's been a kind of dearth of of equity managers
in, in the mining space as well. And it's hard to get you
allocations. And perhaps that's just a
component of a bigger problem with with active management.
Yeah, I think that's, I mean more just a bigger challenge for
the industry, right? It's a poorly understood
industry, yeah, even in this country, but you know, you know,
globally as well. Yet now I think it's more
awareness about supply chains, critical minerals.
It's starting to get a little bit more, you know, visibility.
But it is just a poorly understood industry for what is
quite meaningful in in most economies.
Can I ask you a question about the opportunity selection?
Like in some respects, like there's a very diligent
investment process that you have to kind of go through to get a
deal done within these like. We talked about construction
risk and how concentrated portfolios are.
So, you know, the underwriting process for this is is got to be
very, very thorough. Yeah.
And it's, it's thorough. It I imagine can happen quickly,
but often might be like take a bit of time.
Like are there any limitations or anything to do with with with
the way that that happens? Do you think private equity sees
the best deals? Like what do you think?
The best deals sometimes don't even get seen by private equity.
Yeah, that's a really good question.
Selection bias, yeah. Yeah, there, there would be.
I would say, look, you know, when it's a really hot
commodity, it's in vogue, you know, you're you're moving, you
know, the top end of the cycle. Public equity is available.
Look, right now in precious and you know, arguably in some of
these critical metals like, you know, rare earths as well, you
know, companies are able to go and raise, you know, significant
quantums on on public equity markets right now.
They don't need to come to a private equity fund or
alternative, you know, sources of capital and, you know, pay
higher fees or give a little bit more more a way to bring that
capital in the door. So, you know, the private equity
is needed in in markets when you know, you're at the bottom of
the market and public equity can't be raised.
You're in, you know, really nice commodities that are poorly
understood, that need a lot of work to, to understand the
fundamentals of those, those commodity markets or they're,
you know, far fun places. You know, there might be great
projects too, but you know, just we'll be outside the risk
appetite for most, you know, public equity investors as well.
So do they see the best deals? You know, it depends.
You know, there's, there's great assets out there that you had
absolutely no love in, in the public markets and they'll
picked up by, you know, PE funds.
And then, you know, the markets turn, you know, a lot of work's
done to de risk, risk appetites change and these PE funds can
find an exit for these assets that are viewed very differently
in a different market, different conditions.
And that is like the perfect your private equity investment.
You find something unloved and at the bottom of the cycle do
some work and then, you know, get the timing right and and it
is recognized and there's huge value uplift there.
So let's talk about the conditions now.
You mentioned 15,000 private equity groups before.
Obviously only a small number of them are in the mining space,
but there has been an increasing number over time.
We've also seen more and more sources of capital in in the
mining space, be it sovereign wealth funds, be it the
government coming in, be it streamers and royalties flexing
their muscles and having greater allocations.
How does the the landscape look right now, perhaps contrasting
with when you came in? And what do you see that looking
like a few years down the road? It's a good question because it
certainly is evolving and you know, has been evolving for a
long time. Look, there's I think lots more
mining PE funds around now. Yeah, there's the those that
were early in the game, you know, 1520 years ago that now
have multiple strategies that have been, you know, quite
successful, sustainable, raised multiple fund vintages in each
strategy, diversified across different strategies as well.
And there's new entrance to the game as well.
People that have worked in one fund, they've gone out to start
their own fund, etcetera. So there there's definitely more
mining PE funds out there. But in terms of capital being
allocated to, to mining PE, my gut feeling is it's probably
hasn't changed that much. However, there's more competing
sources of capital for the the actual assets out there, as you
say. So you've definitely seen your
sort of government step up and want to be involved more.
They don't know how to do it well and, and try still trying
to figure out, you know, the best strategy to allocate there.
But you know, you are seeing them, you know, have a great
appetite to move and, and prepared to write checks now.
And that's something that's changed and that's ultimately
competing for a competing source of capital for PE.
You know, that's getting might be squeezed out on some
particular deals, particular commodities there as well, the
sovereign wealth funds as well. I think that's probably more on
sort of the stage you are in the value chain these commodities.
But certainly things that private equity probably didn't
chase, things that were midstream or downstream where,
you know, the returns are probably more industrial like,
you know, single digit percents. Yeah, there's not not great
economics in these assets, but you know, there's a lot of
broader, broader, broader benefits, you know, in country
building out, you know, skills, whole supply chains, et cetera.
You're seeing those groups start to want have a big appetite to
do that and get ready to step in there.
And they're happy to to make these investments without
compelling economics too as well.
And when you do go midstream downstream, obviously you need
the upstream feed to come along there.
So yeah, that's where, you know, PE is starting to tie in with
some of these groups that are looking to build out the
midstream downstream in their countries, in their regions as
well. So that that's definitely
growing and I think it will continue to.
And that's really just playing into this whole, you know,
onshoring of the supply chain, thematic, you know, across the
whole world. So what does that mean for for
private equity returns going forward?
Well, I think it, it just narrows the line of where they
can play again to these other groups, you know, with sort of
streamers royalties able to provide, you know, pretty low
cost capital to some of these assets just means the universe
of assets that private equity might invest into is probably
shrinking. And in terms of private equity
being a competitive solution for these companies and assets,
they're trying to finance it, They're probably less
competitive compared to what else is being given to them
right now as well. There's probably always going to
be a need for, you know, PE financing in, in you get
difficult jurisdictions, obscure commodities, yeah, things
they've got some sort of overhang there that, you know,
needs quite a lot of effort to resolve.
But the all the easy low hanging fruit I think is is becoming
financed by by others. Is there is there a pro cyclical
nature to the ability of private equity funds to to to actually
raise their own capital as well like to the endowments more
forthcoming with with with with, you know, you know, big funds at
at very like you know, cyclical highs in commodity markets and
then you have to deploy it in the high times.
Is there any pro cyclical element to to the history of
private equity research I. I think fundraising probably has
a degree of pro cyclically. Yeah, ideally you raise the up
and then you wait for the crash and then you deploy them.
Yeah, I mean, the the hardest thing I think investing
generally is be truly counter cyclical, not pay attention to
to the noise and everything else going on.
And I'd say, you know, whether it's, you know, pay manager, you
know, you and I investing retail investors or even these, you
know, enormous asset managers, it's no different.
It's really hard to be disciplined.
So I think certainly. I don't know what you're talking
about. I've done more trades in a bull
market. Certainly when when you're in a
good market, you know, I think they're a lot more receptive to,
you know, marketing conversations with the pay funds
that that are fundraising. And again, when it's it's
probably the wrong time to be, you know, deploying, you know,
they should have been there, you know, years ago.
So they could come in right at the bottom of the cycle.
So, yeah, it is difficult because, you know, by the time a
fund's raised and they're deploying, you know, you're
potentially at the top of the cycle or you've missed it, you
know, for particularly commodities.
And you have to shift, you know, your strategy to other
commodities as well. So it's a very dynamic process.
You know, in an ideal world, yes, you'd have a lot of dry
powder, you know, a lot of capital committed to you, to
your fund that you hadn't called down on yet.
And you could call it down at the very bottom of the market
when you saw the very best opportunities.
In an ideal world, that would be how it worked.
But realistically, you know, things are doing well now.
You have some fantastic exits in an older vintage fund.
You're getting momentum there. Yeah, LP's are probably pretty
receptive to putting money into a new fund, even though, yeah,
the commodity cycle and market is really at a different point
in time. Like the old time record, you
know, best private equity deals in in the mining industry.
It's like you get like, yeah, you hear stories of when you
when you join a PU fair. I mean like, oh mates, such and
such was the best deal ever. Yeah, look, there's, there's,
there's plenty of those around. You know, people talk about tin
baggers, but you know, I've, I've seen quite a few of those.
I know RCF had some phenomenal wins in, you know, rare earths
in the early funds with Mountain Pass.
You know, that's, that's a pretty well known example.
One of their other strategies in mining innovation, you know,
where they invest in a lot of different mining technology,
they invested in company called BMT blast movement technologies,
these little, you know, balls with RFI DS that go inside blast
holes and they can track the heave, you know, you know, pit
gold mines. So you can track where, you
know, the the always being distributed post blast.
I mean, that was a phenomenal investment.
It was, you know, it's a sort of product that could be readily
consumed to low cost, you know, at at gold mines globally.
So, yeah, another one of those, you know, phenomenal returns you
hear about, you know, you've got to be lucky.
But there's also a lot of work behind the scenes in
identifying, you know, identifying, yeah, the right
market, the right product in that case as well-being counter
cyclical, you know, making a bold call to allocate, you know,
significant capital at the bottom of a market when it's
hated as well. So yeah, there's, there's a lot
of thought to it, a lot of work, a lot of diligence done to the
very, you know, calculated, you know, risks that are taken.
Tembo and Spartan wasn't a bad bet, and the RCF Pilbara one
that had a pretty pretty speedy returns.
Although in my mind they're just not private equity bets you're
buying a stake in. Balance sheet down around, it's
like, yeah, yeah. Yeah, I mean Altura was a
distressed because I mean every, I mean arguably Pilbara didn't
have the biggest balance sheet at the time too.
Galaxy, you know, needed raise capital at the time too.
It was survival for all of the lithium players at that time.
But you know, Purebra, I mean it was one ore body and had a fence
put over the middle of it. It really should have been, you
know, a single operator from day one.
It was a very logical consolidation to do.
But yeah, had the support of patient counter cyclical money,
you know through RCF there to to underwrite, you know the
acquisition there, which you know would have been hard to do
on that particular example. You know, there was other
bidders in there, another, you know, listed company that needed
to raise capital that had a had a proposal there.
But again, contingent on raising, you know, public equity
at the bottom of the market for you know, close to its market
cap would have been pretty hard to execute on versus you know, a
fully underwritten solution with you know, private equity money
there too. So, yeah, there is definitely
like a role to play on the M&A side and providing some funding
surety. Actual synergies in mining,
that's amazing. There's a lot of these odd
bodies with fences across the middle.
It's just too easy. They're layups for you.
One last one from me, Fraser, I want to talk about the commodity
traders and then stomping on the feet of of private equity.
And perhaps they're just another player that makes the, the the
playing field a bit smaller for, for private equity.
But we've seen a number of these traditional oil commodity
traders come in, build out metals and mining teams.
A lot of them want off takes and they're sort of finding their
way in. Are they a competitor you think
represents a a challenge to the the PA industry?
Yeah, they are, They are, right. Look, they've got an, you know,
enormous balance sheets that aren't particularly productive.
So, you know, low cost of capital, you know, for them they
can, you know, provide financing, you know, well,
that's very competitive, you know, to any company that's
looking for financing to build their project.
So their balance sheets have grown.
Their cost of capital is very competitive and they're willing
to deploy it now to secure a product.
So their, their appetite to transact is a lot higher and the
size of the checks they're willing to write for the
equivalent amount of metal and product is probably higher as
well. And there's more players in
there. There's the conventional, you
know, oil and gas, other types of commodity traders that are
now willing to, to get into, you know, proper, you know,
concentrate trading. And, you know, they're going to
be quite aggressive on their terms to secure supply,
particularly as, you know, they're coming, you know,
they're getting into the space. They're trying to steal a little
bit of market share from, you know, the incumbents as well.
So that's definitely going to be, you know, competing source
of capital for Pai mean if you know traffic euro comes in and
does, you know, an off take prepayment facility at so for
plus 2% circuit 8%, well, you know, PE funds not going to be
able to get a return if they had an 8% coupon on their facility
to, you know, they're probably going to be a lot higher.
They need to find other ways to get the return.
So really hard for for people to compete there.
The trade off is maybe giving a what there's a bit of leakage on
the terms of the actual off take as well.
That's somewhat of a black box too.
Hard to really know how much leakage there is what is you
know market standard there. But you know they're certainly
offering very competitive financing packages in parallel
with with off take there. At the same time, you know some
of these other groups, you know some of these other governments
and just even PE funds to looking to secure off take as
well. It's no longer free up for grabs
for everyone. There is a lot of demand for the
actual product. The rights to that product are
becoming more and more valuable. The the exits of private equity
is just one thing I want to touch on too.
If you've got a got a fund that's coming to the end of life
in the end of the 10 years, like what are the options available
if, if some of the some of the assets that are within that
portfolio maybe haven't been realized yet or or there's
there's liquidity challenges to realizing them?
Yeah, good, Good question. Because yeah, it doesn't always
go right. Yeah, you're in something pretty
niche, you know, diamonds in Lesotho to, you know, book
siding. You know, you can't, you can't
just run a sale process and flip those things overnight.
So what do you do? You can, you can try really hard
to, to make the project more attractive.
And maybe that's an, an expansion, it's consolidation
with, you know, a neighbor sending it into a larger vehicle
that's more diversified. And maybe you'll, you'll, you'll
take a hit there on on the valuation, but you might have a
pathway to liquidity eventually. Being another fund.
Or well another another mining company there assets, assets.
So these are things you could do with the portfolio company, the
investment itself. If that fails, what do you do?
Well, it's probably more a problem for, you know, you see,
you see more in general as PE, but you see extensions to funds.
So that might extend the fund beyond those 10 years.
But they're not, you know, getting a management fee on, you
know, the, the capital they're managing anymore.
They're just, you know, trying to buy some time to get towards
an exit or pending that not working.
You do see what's called like private equity secondaries where
they're effectively selling, you know, the individual portfolio
companies or you know, all of the portfolio to another fund.
And there's dedicated PE funds that just go around mopping up,
you know, these mature assets from, you know, yeah, funds that
are in there for life and they'll buy them a big discount.
The pitch for them is that, you know, they're much, these
investments are much closer towards their exit.
There's been a lot of capital sunk, a lot of value added.
They just need a little bit more time to get towards, you know,
the exit. And so the prize is there and
there are actually some examples of really successful funds that
just do. Sounds like a good show.
Secondaries. The marking of how they measure
those is pretty controversial. Absolutely as well.
And and valuation across the board, you know, for private
companies, you talked, we talked earlier about, you know, some
funds, you know, raising funds very quickly.
You know, they've got all of these private investments, you
know, public company they took private.
What's it going to be valued at at 30th of June?
Well, it's, it's a work of fiction.
It can be whatever you want, right.
Look, there is process to it. It is ordered.
But ultimately, yeah, there is some, it's a narrative on
valuation and, you know, commodity prices.
You're choosing. Yeah, every mining project
sensitive to that, you know, let's say it's it's a market
based approach, you're looking at other comparables
transactions, you know, you're cherry picking what you want
there. So you know, these funds can
manage the valuation volatility by managing these private
company valuations. If your whole portfolio is
private company investments, you can call it whatever you want
and you know, magically in two years, you know, these they've
been marked up really well. That's been quite cynical, but
you know, there is a little bit of wiggle room, you know, you
could have there and you know, you could say, hey, My Portfolio
is, is sitting at, you know, a 1.3 X mark to market today based
on my private company valuation. So someone coming in.
So actually that that looks great.
I'll come into that fund or not even put some money into your
next fund. This looks great.
So there's, you know, the incentives are there for it to
be a little bit abused. I think it it's tricky though.
They generally genuinely are, you know, lots of private
investments within these portfolios and you know, there
is a bit of, you know, a bit of room to move on, on a lot of
these things. And and you know, PE funds have
got a lot of conviction for these things too, you know, so.
There's there's a view out there.
It's a view that like we've we've said before or parroted
and it's even a view that we've we've heard from like, you know,
massive, massive capital allocators as well.
And that's the private, like private equity mining just
doesn't quite work. Like the, you know, there's,
there's a floor in the, in the, in the funding model of the
returns don't quite kind of get there.
Do you disagree with that take? Yeah, I look, I would say, you
know, there's pros and cons to, you know, this asset class and
product, you know, in in the context of this industry, does
it provide capital to projects that wouldn't have otherwise be
funded? Yes, I would say some of these,
you know, niche industrial minerals, you know, good quality
projects in far-flung places, you probably couldn't raise
capital to build them. Without, you know, capital
coming from PE. So yeah, is there on the balance
more projects built, more supply because of it?
I'd say yes. However, you know, there is, you
know, there's a lot of leakage in the model for investors that
go into it, you know, through management fees, performance
fees. You know, it's still a really
risky asset class. You know, you know, they're
illiquid, generally illiquid investments and it, it is really
hard to, to find exits for these things.
You know, you might not get more than one shot to get your exit
on, you know, what might be, you know, a few $100 million
investment, you know, so still, it's not an easy game to play.
There are some really good managers out there with a lot of
experience and you know who, who've learned how to navigate
these and build sustainable platforms that that do it really
well. You know, when we talk about
managers, I mean, you know, there's there's investment
committees, there's, you know, a deep amount of in house
technical expertise. Yeah, there is a lot of of
people behind the scenes, you know, thinking through, you
know, what this might look like doing a lot of work very hands
on in managing these investments, you know, through
the way there. It's not, I think you know, a
handful of people just, you know, pocketing a lot out of it.
There is some generally some heavy lifting to be done and and
that's why the the fees are there and there's incentives.
But it could, yeah, it could. It's it's somewhat self-serving
as well. If you were there and the
capital's available and you're raised to all these funds, yes,
you could have a lot of GNA. If you were like, if you were an
LP, for example, like is there a type of strategy or something
that you'd be like most most favourable to like having,
having, you know, thought about the, the model as deeply as as
you have? Do you think there there are
some some models that are like more compelling than not?
Yeah, definitely, definitely. I think partnering is really
important. I think you know being the only
source of capital and having a control equity position means
you know if there is risks and you have to follow on fund it's
you know that could that could bleed you pretty quick.
So having you know one or two other you know groups in there
that are aligned and that might actually be some other PE funds
that you know you're just Co investing on similar terms in
the same parts of the cap structure.
So having. If we do that with Aussie Super,
sometimes it'd be a. Yeah, look, yeah, Aussie Super
was in there on Pilgrim Minerals and in Genesis to I think more
on some other projects have been financed where, you know, you
see a whole group of PE funds there in similar parts of cap
structure. So having some partners there
and and maybe it's even a trader there who has the off take, but
it's also in similar parts of the capital structures.
You, you know, someone who's also incentivized for the equity
to do well as well. They're not going to give you
aggressive terms because they've got a bit of equity too.
So having just everyone aligned and and having the the capital
providers relatively diversified, I think that makes
a lot of sense. The, you know, the average, you
know, capital cost to build a project has been increasing and
will continue to capital intensities rising.
You know, there's inflation in the sector as well.
So the ticket size that a lot of these funds, right, if they've
got a billion dollar fund and they do, you know, 5 to 10
investments, that can be a hundred $200 million checks.
It's not enough to build these projects on their own anyway.
So partnering up I think makes a lot of sense.
Keeping these things private through construction, I think
makes a lot of sense. Construction ramp up's a really
tricky time for a project. There's a lot of surprises, you
know, they don't go smoothly. You know, there's a lot of
people learning about the ore body.
There's ore body knowledge, understanding, you know, the
metallurgy, geometallurgy, the variations there and you know,
how the plant performs, where there's the bottlenecking
needed. You know, there's a lot of
things to iron out. You know, if you didn't have to
do quarterly updates, you know, I think that'd be a great thing
as you can, you know, ramp up this properly, get it set up and
then take it to the public markets.
I think that'd, that'd work great and that that would be a,
a nice strategy. I think you couldn't do that for
your whole fund. Yeah, you don't want to take,
you know, that sort of construction risk at the same
time, you don't want to be building 2 projects at the same
time. So you probably don't want more
than half your portfolio in construction.
So just having a a blended approach to, you know, in
construction projects, but also finding these, you know, turn
around opportunities, M&A opportunities, finding, you
know, just great management teams you want it back and you
know, corner stoning their next acquisition investment things.
Having a really diversified rounded out approach.
But yeah, mix of private investments in the fund would
make a lot of sense. Partnering with other groups.
Yeah, just having a small mounting construction, the rest
in sort of operating strategies have a little bit more, you
know, different kind of strategic drivers there.
That would be a great fund if I was doing it.
I'm with you there. I'm sure there's a lot of
managers out there that would love to not quarterly report as
well. I think that'd be helpful for
for a lot of folks out there. And the fees would be a little
bit different. I think I would keep it pretty
lean. I think, you know, if you can
raise sort of a billion dollar fund and you're making 510
investments, you know, do you really need an enormous team to
find opportunities? You know, I think that's
probably an area where you can be very targeted in what you
want to go after. So you don't need a huge amount
of resources there managing it. Yes, you definitely need yeah, a
good team that to be involved with the portfolio companies
there. But you know, do you need to do
in house everything in terms of, you know, finance, accounting,
legal, maybe you can outsource a lot of that and just run with a
really lean headcount. Yeah, maybe that, that is model
to have a really lean management fee so you can keep a small,
small team and yeah, weight it towards you know, your
performance fee to really, you know, be incentivized.
Yeah, that's a, that's a real point of difference with just
out and out equity investors that the team size is a a huge
point of difference. Fraser, this has been
spectacular mate. I've really enjoyed learning all
about the, the PE world and I'm sure all the money miners have
as well. So thank you for coming and and
sharing all your wisdom with us mate.
Thank you. Just just a few gems.
Mate, that was, that was unreal. A massive thank you to our
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